AN ANALYSIS OF THE EFFICACY OF MINORITY PROTECTION UNDER NIGERIAN COMPANY LAW
This dissertation entitled „‟An Analysis of the Efficacy of Minority Protection under Nigerian Company Law‟ which analyzed the principle of majority rule vis-à-vis remedies for protection of minorities under Nigerian company law was aimed at ascertaining whether the Nigerian company law had made enough protection for minority shareholders in the face of majority rule, and whether such protection were adequate, realistic, practically realizable and enforceable. It is trite law that a registered company is a separate legal entity different from the shareholders or members of the company. The officers of the company are usually appointed by the general meeting to conduct the affairs of the company in a manner that would serve the best interest of the company and also the members. The shareholders of the company can be categorized into two – majority and minority shareholders. The decisions regarding the affairs of the company and issues affecting the welfare of the shareholders were ordinarily supposed to be taken at a general meeting in a democratic manner. In other words, where matters were put to vote, each member was entitled to one vote, unless a poll was taken in accordance with the provisions of the company‟s articles or the Companies and Allied Matters Act 2004. However, most times it was found that the majority shareholders (who may also be directors or officers of the company) would want to impose their views on the minority shareholders, in order to have their way. Similarly, the majority often ran the affairs of the company in an illegal, irregular or oppressive manner, just to satisfy their own selfish or pecuniary interests, without considering the interests of the company or the minority shareholders. In arriving at decisions at meetings and to justify the implementation of such decisions, they usually labeled them „‟majority decisions‟‟ or „‟majority rule‟‟ in order to stifle minority opinion. In such situations, what can the minority do to assert their rights and redress the wrongs being perpetrated on them by the majority or is their situation hopeless, helpless and without any remedy? It was the existence of this problem that motivated this work. The work attempted to review the adequacy cum efficacy of the remedies available to minority shareholders in the face of oppression of the majority vis-à-vis current events in company transactions in Nigeria. The sources of information used here is doctrinal method of acquiring data, thus combining several documents, including statutes, law texts, journals, law reports, pamphlets, conference proceedings, and internet to accomplish the work. In conclusion, the researcher found that the doctrine of minority protection seemed not to be much of a reality under the Nigerian company law. The research found that the lack of award of damages for personal action or representative action as provided in Section 301 of CAMA could discourage aggrieved minorities to pursue remedies. It was also found that in Section 300 (d) CAMA, the expression committing „‟fraud‟‟ is strong and connotes commission of crime; so by law of evidence, it requires a higher standard of proof, that is, beyond reasonable doubt. It was equally found in Section 301 (4) CAMA that the provision for security for cost by the court unnecessarily raises the standard of requirement for enforcement of rights or enjoyment of protection afforded a minority by that provision. Accordingly, it was recommended (among others) to provide stiffer penalties in the law and for our courts to be courageous to apply the sanctions with full weight, without prejudice to the status of the offender. It was also recommended that there is need to include the award of damages as one of the remedies available to an applicant under Section 301 CAMA especially where he could prove any financial loss suffered as a consequence of any breach by the company or director.
TABLE OF CONTENTS
Title Page – – – – – – – – i
Declaration – – – – – – – – ii
Certification – – – – – – – – iii
Dedication – – – – – – – – iv
Acknowledgements – – – – – – – – v
Table of Cases – – – – – – – – vi
Table of Statutes – – – – – – – – xi
Abbreviations – – – – – – – – xii
Abstract – – – – – – – – xiv
Table of Contents – – – – – – – – xv
1.1 Introduction – – – – – – – – 1
1.2 Statement of the Problem – – – – – – 2
1.3 Aim and Objectives of the Research – – – – 3
1.4 Justification of the Research – – – – – – 4
1.5 Scope of the Research – – – – – – 5
1.6 Research Methodology – – – – – – 5
1.7 Literature Review – – – – – – – 5
1.8 Organizational Layout – – – – – – 8
CORPORATE PERSONALITY, CORPORATE MANAGEMENT AND NATURE OF MAJORITY RULE
2.1 Introduction – – – – – – – –
2.2 The General Meeting – – – – – – – 13
2.3 The Board of Directors – – – – – – 14
2.4 The Managing Director – – – – – – 15
2.5 Corporate Management and Nature of Majority Rule – – 17
2.6 The Principle of Majority Rule – – – – – 23
2.7 The Rule in Foss vs Harbottle – – – – – – 26
2.8 Statement of the Rule – – – – – – – 27
2.9 Reasons for the Rule – – – – – – – 32
2.10 Analysis of the Rule – – – – – – – 33
2.11 Exceptions to the General Rule – – – – – 35
MAIN REMEDIES AND PROTECTION FOR THE MINORITY
3.1 Introduction – – – – – – – – 37
3.2 Analysis of the Exceptions to the General Rule – – – 40
3.2.1 Entering into any transaction which is illegal or ultra vires – – 40
3.2.2 Purporting to do by Ordinary Resolution an act which by its
Constitution or the Act requires to be done by Special Resolution – 47
3.2.3 Where any act or omission affects the applicant‟s individual rights as
a member – – – – – – – – 48
3.3 Personal and Representative Action – – – – – 53
3.4 Derivative Action – – – – – – – 55
3.4.1 Who May Apply – – – – – – – 59
3.5 Petition for Relief on Ground of Oppressive or Unfairly Prejudicial
Conduct – – – – – – – – 64
3.5.1 Oppressive or Unfairly Prejudicial Conduct – – – – 65
ANCILLARY REMEDIES AND PROTECTION FOR THE MINORITY
4.1 Introduction – – – – – – – – 71 xvii
4.2 Investigation of Companies and their Affairs – – – 74
4.2.1. Investigation based on Application by Members – – – 75
4.2.2. Investigation based on Application by the Company – – – 77
4.2.3. Investigation by Order of Court – – – – – 77
4.2.4. Investigation on the Commission‟s own Motion – – – 78
4.3. Powers of Inspectors and Duty of Officers of the Company – – 80
4.4. Inspector‟s Report – – – – – – – 82
4.5. Investigation of Company‟s Ownership – – – – 86
4.6 Winding up on the Just and Equitable Ground – – – 90
4.7. Meaning of a Contributory – – – – – – 92
4.8 Action by the Corporate Affairs Commission – – – 93
4.9 Other Statutory Remedies/Protections – – – – 96
4.10 Codes of Corporate Governance – – – – – 100
4.11 Intervention of Regulatory Institutions – – – – 103
4.12. One Man Meetings – – – – – – – 105
4.12.1. One Man Meeting By Court Order – – – – – 106
4.12.2. One Man Extra Ordinary General Meeting – – – – 107
4.12.3 One Man Meeting By Proxies- – – – – – 108
4.12.4 One Man Meeting In Wholly-Owned Subsidiaries – – – 108
SUMMARY AND CONCLUSION
5.1 Summary – – – – – – – – 110
5.2 Findings – – – – – – – – 114
5.3 Recommendations – – – – – – – 115
Bibliography – – – – – – – – 119
When a company is incorporated, it acquires legal personality and it becomes a separate legal entity different from the members of the company.1 However, since the company is an artificial person, it can only act and function through natural persons. These persons may be members in general meeting or the board of directors or other officers of the company, who are entrusted with the day-to-day management of the affairs of the company.2 In the conduct of company affairs, the management team is supposed to act in the best interest of the company. Accordingly, decisions are supposed to be reached through a democratic consensus. In other words, the issues are to be discussed at the general or board meeting, and resolutions passed by a unanimous consensus or by majority decision upon taking a vote. Even where, the majority shareholders will ultimately have their way, it is always important that the minority shareholders are allowed to have a say in the matter, before a decision affecting the company or the minority interest is reached. In some instances, you find majority shareholders (who may be directors) who are in control of the company running the company in an illegal or irregular manner, without regard to the provisions of the law. At times they run the company in an oppressive manner to the detriment of the minority shareholders, under the cover of „majority rule‟ simply because they are in the majority.
1 See Salomon vs. Salomon & Co (1897) AC 22. 2 See Section 63 Companies and Allied Matters Act (Cap. C20 L.F.N.) 2004 (hereinafter referred to as ‘CAMA’).
Under such circumstances, is the minority helpless and without any remedy? Even where the law has provided for some remedies, are the shareholders aware of these remedies? In any event, how often are these remedies being utilized by minority shareholders? Also, how often are they being enforced by the courts? What is the adequacy of such remedies? It is also important to review the efficacy of these remedies vis-a-vis current events in company transactions. Can these remedies afford adequate protection to minority shareholders considering the current intrigues and realities associated with boardroom politics and struggle for control of company affairs amongst shareholders and/or directors?
It is against this background that it is sought to critically examine in this research, what remedial options are available to minority shareholders who are facing the excruciating and stifling oppressive conduct of the majority shareholders. The research will try to bring to the fore the current challenges and proffer realistic options.
1.2 Statement of the Problem
Mismanagement of company affairs is a common attitude and social malaise amongst directors and officers of the company. These directors are usually the majority shareholders and most often are in control of the company.
In such situations, the minority hardly complains and even where they do, their complaints are rarely respected. The wrongdoers under the cloak/mask of majority rule muzzle their way and take actions which are irregular or not in the best interest of the company as a whole. In fact, in most cases, the actions are rather in their own selfish interests. The actions may not only be oppressive, but also prejudicial to the interests of the minority shareholders.
This dissertation examines the question whether or not the remedies provided as minority protection under the Companies and Allied Matters Act are adequate in the face of the provisions for majority rule under Nigerian company law. Although, CAMA while affording protection to such minority shareholders by providing some remedies, such remedies seem to be inadequate given the current realities and complexities in the power game for control of company affairs. So what other options are available to minority shareholders, or should they just stand, hands akimbo and watch the so called „majority‟ fritter away the assets of the company? It is these agitating questions that this work seeks to answer. We want to show whether the doctrine of minority protection is a sham or reality and whether the provision of CAMA in this regard is adequate. We want to recommend ways to improve and give more protections to the minorities, especially in the present reality in Nigeria where those who are in charge of the companies run it as their personal businesses, with total disregard to the rights of other members of the company. The banking sector in Nigeria is a clear example. The research will seek to find solutions to the problems of protection of minority shareholders.
1.3 Aim and Objectives of the Research
The principal legislation regulating management and conduct of company affairs in Nigeria, including the rights and remedies available to the shareholders, is CAMA. Most common law remedies have been enacted as part of provisions of CAMA. It therefore means that any perceived defect or inadequacy of the provisions of CAMA will invariably adversely affect the enjoyment of the rights and remedies granted to the beneficiaries therein. This dissertation aims at examining the legal and institutional framework for protection of the rights of the minority in the administration of company‟s affairs. In that regard, the research is set to achieve the following objectives:
(a) To examine the existing legal provisions regarding the application of principle of majority rule vis-à-vis the protection of minority interests in the administration of company matters;
(b) To examine the adequacy or otherwise of the remedies available to the minority shareholders in the face of illegal, prejudicial or oppressive conduct by the majority with a view to showing its efficacy or otherwise, given the current realities;
(c) To identify and suggest further or alternative remedies that could be utilized to afford additional protection to minority shareholders against oppressive conduct by the majority;
1.4 Justification of the Research
There is dire need to find alternative remedies to stem the oppression of the minority in view of current challenges, complexities and realities in management of company affairs. The present statutory provisions seem inadequate, and the few available remedies appear under-utilized. The law may seem to have failed if it cannot provide adequate remedy to an aggrieved minority.
The research is intended to find and suggest alternative and efficacious remedies which will afford further protection to the minority. The outcome of the research will be useful to judges, legal academics, legal practitioners, students of law, legal researchers, regulatory institutions and certainly minority shareholders.
1.5 Scope and Limitations of the Research
The research is limited to meticulously wading through the gamut of CAMA and identifying and bringing to fore statutory provisions intended to afford protection and provide remedies for minority shareholders in the face of oppression by the majority.
The research will also seek other provisions in other laws (e.g. Code of Corporate Governance, Investments and Securities Act 2007 etc) regulating company law which may have made some provisions for minority protection.
1.6 Research Methodology
Given the nature of this legal research, the research methodology to be used is doctrinal as it involved mainly the use of library. The primary source of materials for the research are statutes and regulations; while the secondary sources are law texts, journals, law reports, pamphlets, conference proceedings, and internet.
1.7 Literature Review
For a long time, the issue of the law providing adequate protection and remedies for minority shareholders against oppressive conduct by the majority has bogged jurists and legal writers without a seeming full proof answer being in the horizon. Analyses of the problem can be found in law textbooks (foreign and local), law journals (foreign and local), decided cases by superior courts contained in law reports, and unpublished dissertations. Recourse will be had to these materials, with a critical analysis of their views so as to bring to fore the adequacy or inadequacy of various researches conducted by scholars in the area of minority protection under Nigerian company law with a view to highlighting the relevant areas unattended by writers, and streamlining what the researcher intends to do here.
Gower, in his book, Gower‟s Principles of Modern Company Law3wrote on breach of Corporate Duties and examined the legal remedies available to minority shareholders. He analyzed the common law rule in Foss vs. Harbottle,4 personal and derivative actions, and winding up on just and equitable ground. He concluded by saying that the two greatest weaknesses of the available legal remedies are that despite the increased amount of information supplied to members in annual accounts/reports, it is not likely to afford them enough evidence required to commence legal proceedings with any chances of success; and secondly, that individual members will be understandably reluctant to incur the costs of litigation. However, Gower‟s discussions were obviously based on the English Companies Act of 1989 and decided English cases. This research will assess the adequacy of the legal remedies available to minorities from the provisions of Nigerian local legislations.
Similarly, Davies in his book Gower and Davies‟ Principles of Modern Company Law5did not fare better than Gower in its foreign content bias. In fact, it discussed minority protection with peculiarities to South Asian experiences. As stated above, the researcher will dwell on minority protection with regards to Nigerian law.
Schmitthoff et al, in their book Palmer‟s Company Law6discussed extensively the principle of majority rule, and minority protection in such circumstances. They noted that in English company law, while the substantive aspects of the rule of the majority are not neglected, the emphasis is on the procedural character of that rule. The reason for the foundation of the rule is that in those cases, it is for the company to complain, by suing
3Gower, L.C.B.(1992), Gower’s Principles of Modern Company Law, Sweet & Maxwell, London, p.643-646 and p.672. 4(1843) 2 Hare 461; 67 ER 189 5Davies, P.L. (2008) Gower and Davies’ Principles of Modern Company Law, Sweet & Maxwell, London, p.609. 6Schmitthoff, C.M.(Ed.), (1987) Palmer’s Company Law, Stevens & Sons, London, p.975-979.
the alleged wrongdoer, as the company is the proper plaintiff and the company is the majority. This position fails to address the peculiarities of Nigerian situation where our procedural law are not as advanced and tested as the English law. This is where the researcher intends to do some work and expose the deficiencies.
Akanki in the book chapter entitled, Protection of the Minority in Companies7brilliantly traced the evolution of majority rule to the need to an alternative remedy to winding up. However, with the greatest respect, the learned author‟s critical analyses is more of a discourse without a practical solution for further improvement on the adequacy of the remedies. This is understandable given that the remedies were then new as the legislation on company law had barely been enacted in 1990 and probably had not been tested. The researcher is set to provide practical alternatives to the inadequate remedies.
Bhadmus in his book Bhadmus on Corporate Law Practice8discussed Protection of Minorities in Chapter Fourteen. He stated that as a general rule, the majority is supreme. However, his treatment of the remedies for the minority is skeletal without addressing the impediments in utilization. This is the area the researcher will focus.
Orojo in his book Company Law and Practice in Nigeria9discussed extensively the protection of individual membership rights, protection of corporate membership rights, the rule in Foss vs. Harbottle and its exceptions, as well as other minority protection provisions. However, despite the detailed discussions, he omitted to assess the adequacy of the remedies provided by CAMA for minority protection. The researcher will do a critical assessment of the adequacy of these remedies and seek further options.
7Akanki, E.O. (Ed.) (1992), Essays on Company Law, University of Lagos Press, Lagos, p.276. 8Bhadmus, Y.H. (2009), Bhadmus on Corporate Law Practice, Chenglo Limited, Enugu, p.246. 9Orojo, J.O. (2008), Company Law and Practice in Nigeria (5th Edition), LexisNexis Butterworths, Durban, p. 205.
1.8 Organizational Layout
This research work is made of five chapters. Chapter One focuses on general introduction and preliminary issues like research problem, aims and objectives of the research, justification of the research, scope and limitations of the research, research methodology, and literature review.
Chapter Two discusses corporate personality, corporate management and nature of majority rule. This obviously entails explaining in detail the legal principle enunciated in the case of Foss vs. Harbottle, the statement of the rule, the reasons behind the rule, the scope of its applicability, and its codification in Nigeria.
Chapter Three deals with the main remedies and protection available to the minority shareholders. This involves detail discussion of the exceptions to the application of the general rule in Foss vs. Harbottle. It also discusses other remedies like personal and representative action, derivative actions and petition for relief on ground of oppressive and unfairly prejudicial conduct.
Chapter Four highlights other ancillary reliefs and protection for the minority. Such other reliefs include powers of investigation by the Corporate Affairs Commission (CAC), and winding up on the just and equitable ground. The power of CAC in instituting legal actions against the company is discussed and its efficacy analyzed. The research explores and identifies other statutory powers bestowed on other regulatory institutions which seem largely unutilized despite their potency.
Chapter Five is the conclusion and brings the research to a climax with a summary, findings and recommendations.
AN ANALYSIS OF THE EFFICACY OF MINORITY PROTECTION UNDER NIGERIAN COMPANY LAW